Can I Take Money Out of My IRA Mutual Funds and Buy CD's Without a Penalty?

Your IRA is designed to help you save money for retirement. Depending upon its configuration, you'll either claim the total value of your annual contributions as a deduction on your tax return each year or enjoy tax-free withdrawals once you reach retirement age. As long as you refrain from withdrawing funds from it during your working years, your IRA will eventually save you thousands of dollars in tax payments.

You can own a variety of assets in your IRA account. In fact, virtually every investment vehicle that can be purchased on the open market is eligible for inclusion in your IRA. You're free to buy and sell the assets in the account at will provided that you don't exceed the age-dependent annual contribution limits of $5,000 or $6,000.

If you wish to sell a portion of your IRA-protected mutual fund holdings and use the proceeds to purchase bank-issued CDs, you may be able to do so without making a withdrawal from your tax-sheltered account. Many brokers that peddle IRAs offer a limited selection of individual CDs for open-market purchase. Although broker fees may slightly reduce the effective interest rates on these vehicles, they may still be safer and more reliable than other types of investments. Many full-service brokers specialize in longer-term CDs that carry attractive rates of interest.

Your broker might not offer an acceptable range of CD choices. If this is the case, you'll probably still be able to invest in bank-issued CDs without being forced to pay a withdrawal penalty on the reinvested funds. Most banks will permit you to invest your IRA funds directly into CDs without disturbing the structure of your retirement account. To learn more about this process, visit your preferred bank and speak with a retirement specialist.

To complete the transfer, you'll probably be asked to fill out some official-looking transfer forms and provide proper identification. However, the process is fairly routine and shouldn't require additionalverification. After a standard probationary period, your funds will be transferred.

There are certain situations in which you can withdraw funds from your IRA without immediately reinvesting them. For instance, most higher education expenses are tax-exempt. Certain medical expenses may be exempt as well. Although the exact cutoff varies from year to year, it's unlikely that you'll have to pay taxes on any IRA funds that you withdraw to cover medical expenses in excess of 8 percent of your total annual income.